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Plains All American Pipeline, L.P. (PAA - Analyst Report) announced that it has entered into an agreement with PAA Natural Gas Storage, L.P. to merge with the latter in a unit-for-unit transaction. The deal is valued at $1.41 billion. The proposed merger is expected to be completed in the fourth quarter of 2013. Post merger, PAA Natural Gas Storage will be working as a wholly-owned subsidiary of Plains All American Pipeline. The completion of the merger is subject to several approvals.

Houston, Texas-based PAA Natural Gas Storage, L.P. is a limited partnership, which is engaged in the development, acquisition, operation and commercial management of natural gas storage facilities.

Per the agreement, the public unitholders of PAA Natural Gas Storage will receive 0.445 common units of Plains All American Pipeline in exchange for per PAA Natural Gas Storage common unit. In addition, the public unitholders of PAA Natural Gas Storage will receive cash for any fractional common units of Plains All American Pipeline, if not issuable in the merger.  Plains All American Pipeline will issue approximately 14.7 million additional common units to meet the transaction requirement.

In Aug 2013, Plains All American Pipeline made initial announcement about its current merger plan. As per the earlier agreement, the unitholders of PAA Natural Gas Storage were supposed to receive 0.435 common units of Plains All American Pipeline in exchange of per PAA Natural Gas Storage common unit. The rate of common unit considered $22.74 for the purpose, calculated on the basis of trailing 10-day average closing price of Plains All American Pipeline’s common units through Aug 26, 2013.

We consider current announcement of merger as a positive move for Plains All American Pipeline as it will enable the partnership to strengthen its service-offering portfolio. The merger will help the partnership to serve more number of upstream companies in a better way, while expanding its operations in La., Miss. and Mich. areas.

However, we are concerned about the partnership’s over dependence on third-party service providers at the supply and logistics segment, and delay in drilling and development activities for strict guidelines and higher operating costs, which might challenge its forthcoming performance.

Plains All American Pipeline currently has a Zacks Rank #3 (Hold). However, other stocks from the industry that are presently performing well include Pioneer Southwest Energy Partners L.P. with a Zacks Rank #1 (Strong Buy) and Energy Transfer Equity, L.P. (ETE - Snapshot Report) with a Zacks Rank #2 (Buy).

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